How Low will the Fees Go?
The title.
How much lower do you think fees will be in the future for active funds?
Also, as of 2024, would you recommend the next generation to go into this field?
Will there ever be a rebound in terms of inflows, or is what's gone, gone forever?
Would love to hear your guys's responses.
Based on the most helpful WSO content, here's what you need to know about the future of fees in active funds and the asset management industry:
How Low Will the Fees Go?
Future of Active Funds
Recommendations for the Next Generation
Future Inflows and Industry Outlook
Conclusion
The asset management industry is undergoing significant changes, with fee compression and a shift towards passive investing. While there are still opportunities for active managers, the environment is becoming increasingly challenging. Aspiring professionals should be aware of these trends and prepare accordingly.
For more detailed discussions and insights, you can explore the following threads on WSO: - https://www.wallstreetoasis.com/forum/asset-management/will-asset-manag…</a">Will asset management industry just wither away? - https://www.wallstreetoasis.com/forum/asset-management/is-anyone-bullis…</a">Is Anyone Bullish on the Future of Asset Management???
I'm sorry, but it looks like this may be out of my ability to answer... maybe some of the links above might help?
My 2c as someone at a relatively large fund ($100bn+ AUM):
1) Fees: Still have room to materially decrease. Over what time period and how much, I am not sure. Consider that most active managers don't beat their benchmark, and you can buy their benchmark for a de minimis fee these days, there is room to decrease. Even funds that outperform net of fees feel pressure, as many allocators run searches and screen out funds with fees outside their peer group irrespective of performance.
2) Recommend to next generation?: Depends. In general I think it's an unwise career move to target a field that is shrinking without any clear reason to believe it will grow again in the future. Rising tide floats all boats, and vice versa. Before joining I would recommend taking a step back and thinking long and hard about whether or not you are willing to accept the far worse career outlook vs. 20 years ago. The industry is shrinking, for good reason. The days of a seat at a big LO being an easy ticket to high six figure paydays without much risk are fading. If you truly love investing and are willing to accept the risk that you will be obsolete in 10 years without much transferable skills, go for it. I am relatively young (early 30s) and love this job, don't regret joining and am compensated well relative to other careers, but have accepted that the tide is moving against me from a career standpoint and while I might make more than other fields today, in 10 years I might be scrambling to find a job. I am very dependent on my own performance to not get fired, which is fine since it's within my control, but more importantly my fund's performance and overall industry outlook to ensure there's an actual seat for me to fill.
3) Rebound: I would love to sit here and say "yes" but my experience really points the other way. On one hand, increased indexation, market concentration and non-fundamental factors that drive prices these days should in theory create opportunities for us to outperform and become more attractive vs. passive. But look around and there are still lots of managers out there that don't earn their fees. As a theoretical exercise there is a point at which I would think there is an equilibrium AUM split between passive vs. active that enables price discovery while indexing is still an attractive way to invest for the masses. Though today there are still a ton of managers out there who don't deserve to be in business. On the flip side, active is so hated that even if you do earn your fee it's hard to attract incremental assets. I've said this elsewhere but my fund is top quintile in performance over basically all trailing time frames, have beaten our benchmark consistently and we're really struggling to bring in new assets. If a large client redeems we will feel a lot of pain. It's not a fun setup to live through though and while I hope it turns I am not optimistic.
Thanks for your response. I really appreciate it.
Not the answer I was wanting to hear lol. But nice to know the truth.
Directionally right but unnecessarily gloomy. No one knows role of AI, but in terms of the forces we know (active to passive, fee pressures) there is a longer runway than 10yrs. I'd venture 20yrs career runway (ex AI) at outperforming managers with decent AUM scale should be quite doable...and after that point, who cares? You should have saved enough that you can retire well or take a more chill gig after that (IR, corporate, etc)
I mean yeah, if I thought the runway was actually 10 years I would not have pursued this job. But you also qualified that as "outperforming managers" which is a minority of the industry, and that can also flip to underperforming with a couple bad years. Obviously nobody targets working at an underperforming manager but by definition the average person in this industry works at one. I think everyone has to accept that it is totally possible, IMO for anyone not at one of the mega asset managers, that my fund has a couple bad years in the next decade and AUM rapidly declines as a result and from there you're basically fucked. You could argue that's no different than in the past, but what's different this time is that you can't fall back on the idea of "well I can just find a seat at another fund" because that becomes increasingly hard to do as time passes. Especially as basic analysis becomes more commoditized (you call out AI, which I think is likely to materially shrink the # of seats in this industry in the next decade), that puts incremental pressure on us all. Landing my seat was a brutal ride and felt like an enormous feat, I think it's highly unlikely I will be able to jump ship to somewhere equivalent or better if things don't work out here.
Depends how much you fancy hanging out with dinausors.
Work at a boutique LO and sentiment is as poor as can be. Persistent outflows and fee compression that I don’t foresee stopping. The only, temporary, saving grace is bull mkts helping offset some of the secular industry pressure. I think participants in senior seat can still milk fees for a while but for those just joining into junior seats upward mobility and potential comp growth is significantly lower than it was 5,10,20 years ago
I mean LO active equities is a dreadful offering relative to simple ETF or pods. I give the industry 5-10 year max. At least in fixed income there are tax and accounting reasons why institions need to hold the underlying on their balance sheet.
I have another question:
If we take out benchmark huggers, would the percentage of active funds that outperform the market go up significantly?
A few thoughts here:
1. As a general matter, fees will continue to shrink on average across the board with active funds. Another way of framing this is that the chasm between winners and losers will get wider over time - your top end, high performing strategies will probably be more immune vs. others. Allocators certainly factor in, as well as asset owners themselves - they are by and large getting larger, with the ability to insource their investment management and/or press on managers with a finer tooth comb. The reality is that the largest managers, and bank backed AM's, are spending far more on compliance/legal/risk/regulatory oversight than they are anything else - with the exception being technology, to either meet those requirements or scale their business to drive down costs, and/or headcount. Even some of the more 'service' driven managers - thinking of OCIO providers or similar - are seeing fee compression, as everyone's competing for the same dollars. And those dollars have options.
2. Melting ice cube gets thrown around a lot with the Asset Management industry writ large - and yes, I think by and large it's a maturing industry with less and less differentiation across the board. That said - there are absolutely pockets, within the industry, where there are continued growth opportunities. Some of them are more 'structural' than others - i.e. a specific institutional investor type, that has constraints, and you can charge more 'premium' fees so to speak as you have the expertise to service them. I'm less familiar with the hedge fund, PE, alternatives universe - but certain there's plenty there, albeit higher risk. Largely though - I think that finance as a career has been way over romanticized at this point - too many books, movies, and other sources that get people really fired up. It's no better, or worse, than someone being interested in programming or whatever. The 'money falling from the sky era' is, for the majority of positions, largely over. It's a well paying, often technical career, that builds a lot of skills that are useful both in the industry, in life, and to transition to other companies/industries.
3. I hate to over generalize, as our firm is an active manager (fixed income) and we've had net inflows for the past few years. It's not sexy - certainly not a private debt fund that's swimming in cash since everyone is throwing it at them - but gets the job done. At some point the tide will turn, but that's how it goes. The old refrain is that active management comes back with volatility, dispersion of returns, and correlations across securities within asset classes, or even asset classes themselves, moving more independently. Blame Bernanke, Powell, Abe, policy, market dynamics, indexing, QE, asset owners, firms, time, EMH, MPT, MMT, the Dali llama (that might be unfair - and I'm kidding) - but there's a lot of challenges for active managers, before you get to the skill or edge discussions to do it.
Thanks for the insight. Do you think the moves to passive are partially being accelerated by the effects of QE? And will active management make a comeback once this thing stabilizes?
Eum et voluptatem veniam ea consequuntur neque. Qui aspernatur adipisci doloribus ducimus aut beatae repudiandae.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...